I grew up Grubhubbing. I lived in New York City from 2008 to 2014, in the “golden age” of Food Delivery Apps (FDAs). I was in my early twenties, working long hours, and more than 500 restaurants would deliver to me for a nominal fee. I used my oven as a shoe closet – and I relied on Seamless, GrubHub, and DoorDash to survive.
Fast forward to 2022. Now if I want to have dinner delivered, I may pay up to double the price I would have paid to pick up from the restaurant directly. There’s a service fee, a delivery fee, a tip, maybe a small order fee… and the price of the food itself is significantly higher.
What happened?
There are three main reasons for these higher prices:
- A penetration pricing model
- COVID-19
- An end to the price war
What is penetration pricing?
When FDAs first launched in the late 2000s / early 2010s, they employed a penetration pricing strategy to encourage early adoption and win market share. Penetration pricing is characterized by a low price used early in a product’s lifecycle to raise awareness of the product and entice new customers to try it. (Who else remembers the discount codes that got you $15 off your first Uber Eats order?) This strategy is most effective for non-differentiated “experience products” – that is, products that require a consumer to experience them in order to understand the true value. Companies employing this strategy then hope to keep their newly acquired customers when they raise prices back to “normal” levels as the market matures.
The golden age of FDAs was driven by their use of the penetration pricing model.
Benefitting from COVID-19
Like many “stay at home” companies (e.g., Zoom, Peloton, Netflix), FDAs significantly benefitted from the pandemic. In the days of required social distancing, where dine-in was not an option, FDAs offered a safe alternative via contactless delivery. For any late adopters who had yet to try FDAs, the pandemic offered a mouthwatering opportunity.
During the early days of COVID-19, FDAs were able to accelerate the pace of consumer adoption and achieve higher market penetration in both urban and suburban cities across the US. This increased market penetration may have saved the food delivery business model.
An end to the price war
It is this increased penetration and widespread adoption that enabled FDAs to raise prices on consumers. Previously, FDAs had been locked in a price war. Customers were hard to come by and were not loyal to one service over the other, so FDAs competed for these customers with low prices and promotions. The price war was killing the profitability of the industry (as price wars do) while benefitting hungry and lazy millennials like me. Some questioned whether the business model provided a viable path to long term profitability.
However, post-lockdown, with the convenience of food delivery now rooted firmly in the routines of so many American consumers, FDAs can raise prices without the same fear of losing customers. Industry consolidation has alleviated competitive pressure on prices (see: Uber Eats acquires Postmates). Loyalty programs (e.g., DashPass) have now been around long enough to enable users to accumulate rewards, thus incentivizing repeat purchases, and further decreasing price sensitivity.
What B2B companies can learn from FDA’s pricing strategy
This type of penetration price strategy is common in the B2C industry. As a result, in B2B, many executives have a gut instinct to launch a new product at a low price — but, at Holden, we rarely recommend it.
Instead, we recommend a high price “skimming” strategy at product launch. Most of our clients’ products are unique, differentiated, and high value-add (i.e., not commoditized, which FDAs largely are). Also, it can be incredibly difficult to raise prices as the market matures after customers are already anchored at the low entry price. This is the challenge facing FDAs today.
With a skimming strategy, businesses signal to the market the value of the product, while anchoring current and future customers to the higher, premium price point. Then, as the market matures, businesses can lower their prices by introducing tiered offerings to fend off competitive pressure from new market entrants. And many businesses find that lowering prices is more *Seamless* than raising prices.
